2022 (11) TMI 1550 - AT - Income Tax

Cooperative Societies Win Tax Exemption: Interest Income from Bank Deposits Deemed Integral to Business Operations Under Section 80P(2)(a)(i)

Navodaya Nagri Pat Sanstha, Versus ITO, Ward-3, Amravati.

SC/Tribunal ruled that a cooperative society's interest income from bank fixed deposits, derived from surplus business funds, qualifies for tax exemption ... Deduction u/s 80P - interest income earned from deposits or saving account with two Banks - as per AO income so earned is not eligible for exemption u/s 80P(2)(a)(i) for the reason that the interest income was earned from the non-members and principle of mutuality not applicable - HELD THAT:- There is a cleavage of judicial opinion among several High Courts on the issue of eligibility of this kind of income for exemption u/s. 80P(2)(a)(i). Hon’ble Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. [2015 (2) TMI 995 - KARNATAKA HIGH COURT] and Vaveru Co-operative Rural Bank Ltd. [2017 (4) TMI 663 - ANDHRA PRADESH HIGH COURT] took a view that such interest income is attributable to the activities of the society and, therefore, eligible for exemption u/s 80P(2)(a)(i) of the Act. Also in the case of M/s. Ratnatray Gramin Bigar Sheti Sah. Pat Sanstha Maryadit [2018 (12) TMI 1926 - ITAT PUNE] has taken view in favour of the assessee following the judgment of Tumkur Merchants Souharda Credit Cooperative Ltd. [2015 (2) TMI 995 - KARNATAKA HIGH COURT] Interest income earned on fixed deposits with bank partake of the business income which is eligible for deduction u/s 80P(2)(a)(i) of the Act. Accordingly, the grounds of appeal filed by the assessee stand allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the interest income earned by a cooperative society on fixed deposits with banks (Bank of Maharashtra and IDBI Bank) qualifies for exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961.(b) Whether such interest income should be treated as income from business of providing credit facilities to members or as income from other sources.(c) Whether the principle of mutuality applies to interest income earned on deposits made with banks, which are non-members of the cooperative society.(d) Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) erred in disallowing the exemption claim under section 80P(2) and in classifying the interest income as income from other sources.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Eligibility of interest income on bank fixed deposits for exemption under section 80P(2)(a)(i)Relevant legal framework and precedents: Section 80P(2)(a)(i) of the Income Tax Act provides exemption to cooperative societies engaged in providing credit facilities to their members on income derived from such activities. The question arises whether interest earned on fixed deposits with banks, made out of surplus funds, qualifies as income from the business of providing credit facilities and hence eligible for exemption.There exists a divergence in judicial opinion on this issue. Several High Courts including Punjab & Haryana, Gujarat, Delhi, and Kolkata have held that interest income on surplus funds invested in fixed deposits with banks or securities, which are non-members, cannot be attributed to the cooperative society's core business and is therefore not eligible for exemption under section 80P(2)(a)(i). These decisions emphasize the principle of mutuality and restrict exemption to income arising directly from the cooperative's business with its members.Conversely, the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. and the Telangana and Andhra Pradesh High Courts in Vaveru Co-operative Rural Bank Ltd. have taken a contrary view, holding that such interest income is attributable to the cooperative society's business activities and is eligible for exemption under section 80P(2)(a)(i). The Coordinate Bench of the Pune Tribunal also followed this approach in a recent decision, aligning with the Karnataka High Court.Court's interpretation and reasoning: The Tribunal, following the Coordinate Bench of Pune and the Karnataka High Court, held that the interest income earned on fixed deposits with banks is part of the business income of the cooperative society. The funds deposited in banks are surplus funds generated from the society's business of lending to members. Thus, the interest earned on such deposits is integrally connected to the cooperative's business operations.The Tribunal rejected the view that the interest income should be treated as income from other sources merely because it arises from deposits with non-members (banks). It reasoned that the cooperative society's primary business is providing credit facilities to members, and the temporary investment of surplus funds does not sever the connection with the business activity.Key evidence and findings: It was undisputed that the appellant is a cooperative society registered under the Maharashtra Cooperative Societies Act, engaged in accepting deposits and lending money to its members. The fixed deposits with banks were made out of surplus funds not immediately required for lending. The Assessing Officer and CIT(A) had classified the interest income as income from other sources and disallowed exemption under section 80P(2)(a)(i).Application of law to facts: Applying the legal principles and judicial precedents favoring exemption, the Tribunal found that the interest income earned on fixed deposits with banks is eligible for exemption under section 80P(2)(a)(i) as it forms part of the cooperative society's business income.Treatment of competing arguments: The Tribunal acknowledged the contrary judicial opinions but respectfully followed the decision of the Coordinate Bench of Pune and the Karnataka High Court, which are binding precedents in the jurisdiction. It rejected the Assessing Officer's and CIT(A)'s reliance on the principle of mutuality to deny exemption in this context.Conclusion: The interest income earned on fixed deposits with banks is eligible for exemption under section 80P(2)(a)(i) of the Income Tax Act.Issue (c): Application of the principle of mutuality to interest income from deposits with banksRelevant legal framework and precedents: The principle of mutuality generally excludes income derived from transactions with non-members from exemption under section 80P. Several High Courts have applied this principle to deny exemption for interest income earned on deposits with banks, as banks are not members of the cooperative society.Court's interpretation and reasoning: The Tribunal held that the principle of mutuality does not preclude exemption in this case because the interest income arises from the cooperative society's business activity of providing credit facilities to members. The deposits with banks represent surplus funds generated from the cooperative's business, and the interest earned is incidental to the business operations.Application of law to facts: Since the deposits were made from business funds and not from any other source, the interest income is integrally connected to the cooperative's business and is not a separate income from non-membership transactions.Treatment of competing arguments: The Tribunal distinguished the cases relying on the principle of mutuality by emphasizing the nature of the cooperative's business and the source of funds invested in the banks.Conclusion: The principle of mutuality does not exclude the interest income earned on bank fixed deposits from exemption under section 80P(2)(a)(i).Issue (d): Legality of the Assessing Officer's and CIT(A)'s ordersCourt's interpretation and reasoning: The Tribunal found that both the Assessing Officer and the CIT(A) erred in law in disallowing the exemption claim and classifying the interest income as income from other sources. Their decision was based on an incorrect application of the principle of mutuality and an erroneous interpretation of section 80P(2)(a)(i).Application of law to facts: The Tribunal applied binding judicial precedents favoring exemption and held that the interest income earned on fixed deposits is eligible for exemption.Conclusion: The orders of the Assessing Officer and CIT(A) were set aside to the extent of disallowing exemption under section 80P(2)(a)(i) on interest income earned from bank fixed deposits.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Respectfully following the decision of the Coordinate Bench of the Tribunal, I am of the considered opinion that the interest income earned on fixed deposits with bank partake of the business income which is eligible for deduction u/s 80P(2)(a)(i) of the Act.'Core principles established:Interest income earned by a cooperative society on fixed deposits with banks, made out of surplus business funds, is part of the business income and eligible for exemption under section 80P(2)(a)(i).The principle of mutuality does not exclude such interest income from exemption when the deposits are made from funds generated by the cooperative's credit business with members.Income arising from investment of surplus funds in fixed deposits with banks cannot be treated as income from other sources for the purpose of denying exemption under section 80P.Final determinations on each issue:The interest income earned on fixed deposits with Bank of Maharashtra and IDBI Bank qualifies for exemption under section 80P(2)(a)(i) of the Income Tax Act.Such interest income is to be treated as income from the business of providing credit facilities to members, not as income from other sources.The Assessing Officer and CIT(A) erred in disallowing exemption and classifying the interest income as income from other sources; their orders are set aside accordingly.